Tax Q&A: What is the ‘market valuation rule’

By Sarah Megginson | 01 Oct 2019

Q: My partner and I have an investment unit in NSW that I lived in for 15 years before putting it on the rental market. I have been renting it out for four years.

In August, we will be moving from NSW to Queensland and into a new place of residence.

As we are currently renting a unit ourselves, we want to move back into our investment property as soon as the current tenant’s lease is up in order to save some money before we move. But once we move to Queensland it will be rented out again and will no longer be classified as our main residence.

We think it would also be a good time to do up the kitchen and repaint the wall; however, someone told me that if we do this we won’t be able to claim the expenses against the capital gains tax as we would be living in the property during the renovation process. Is this true?

Is there a way to do the renovation whilst living in the unit and still claim it against CGT if and when we sell it? Would it be better to do the renovation just prior to moving out?
 - Michelle

A: The ATO has a ruling called the ‘market valuation rule’, where taxpayers are allowed to calculate the cost base of a property based on the market value at the time the property was fi rst used to produce income. Any additions or renovations that were made after the market valuation date would be eligible to be added to the cost base, regardless of whether the
taxpayer was living in the dwelling or claiming it as their PPOR.

If you do not have a written valuation from the date you started renting the property out, I recommend obtaining one from a professional property valuation firm to ensure everything meets the tax office’s standards and requirements.

For your situation, I understand that you will be able to apply the market valuation ruling from the date you first rented the property four years ago. Any additional fixtures or fittings you have purchased since that date for the apartment will be eligible to be added to the cost base, less any depreciation you have claimed in your tax returns. In addition, any renovations undertaken when you move back into the apartment can be added to the cost base.

Under the ‘market valuation rule’,
taxpayers are allowed to calculate
the cost base of a property based on
the market value at the time a property
was first used to produce income

If there are any repairs and maintenance (such as painting) during this time that originated from general wear and tear during the period of tenancy, they will be immediately deductible in the financial year in which they
were incurred.

Based on the information you supplied, the unit is eligible to be classified as your principal place of residence during the first four years it was being rented. You would therefore be able to claim a partial exemption when you sell the property for this period, during which it was treated as your PPOR. This would be calculated via a daily apportionment, in which the total capital gain is divided by the number of days you owned the property and the tax payable is calculated based on the number of days you are not eligible to treat the property as your main residence.

Need to know

  • Renovations made after the market valuation date are added to the cost base.
  • Maintenance from wear and tear while the property was rented is deductible in the financial year incurred.
  • It’s ideal to obtain a written valuation from a professional.

Catherine Simons
is COO of WSC Group


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